Anticipating a Large 1099C for My Mother's Estate

[Deleted]

This weekend my friend who scans my US mail for me scanned a demand from a collection agency for $285,000 for my mother. I've written them a letter requesting that they close out the file as uncollectible and to cease any further contact (pursuant to the Fair Debt Collection Practices Act). I explained the background of the debt; it was a HELOC on my mother's home and the bank released their interest in the home so it could be short sold. I further explained that there was prior debt including about $50k in federal tax debt as well as another $40k in credit debt that was senior to their claim.

I'm anticipating that either the bank or they are going to issue a 1099c. I filed the final estate and Trust return for 2010.

What happens when a 1099c is issued for a closed Trust? Am I going to have to file another return?

I read the IRS.gov website regarding the Mortgage Forgiveness Act of 2007 and it looks like like this situation should qualify. I'm just hoping that they issue the 1099c this year or next. Alternatively I suppose the estate/Trust would qualify under the insolvency option.

Many thanks for your help!

[mwcpa]

this could create a problem...

I assume no assets were transfered from the estate to any person....

In this case, all of the debts will more likely then not be canceled (unless they can be traced to a distribution).... and 1099-C's should be issued by the credit card companies and the HELOC holder....

A 1041 will be needed when the 1099-C is filed... if not, IRS will send out inquiries, maybe a bill, etc. so, when the form comes, file a return noting the applicable 108 exclusion (insolvency here).

[Deleted]

Hi MWCPA,

Thanks for your prompt response.

I'd like some clarification on the use of "transfer". I sold her rental property and paid debt with the proceeds. Her home was deeded to me subject to a $450k 1st mortgage with the full knowledge and cooperation of her 1st & 2nd (they were related banks and felt that was a better option than foreclosure). Their Broker Price Opinion (BPO) came in at $487K so sales costs would have exceeded the equity. Both transfers (?) were reported on the final tax return.

BTW I should mention that she died in 2008 and the 2nd mortgage holder released their lien in 2008. All of the other creditors (credit card companies and the lender on her car loan) issued their 1099cs in either 2009 or 2010. I suspect that her bank was probably not acknowledging how bad some of their debt was (big subprime lender but not Countrywide) and was subsequently acquired by another bank. My guess is that it's taken a while to go through the records and sell off the really bad stuff to the collection agency.

ETA: I read pub 4681 and see that only part of the debt (about $100k) would qualify for the mortgage relief act.

[mwcpa]

"Her home was deeded to me"...

you may have stepped into a mess here.... the estate should have sold the home.... you, and I am not a lawyer, may have assumed the responsibility of the debts even though they cooperated, they are looking at you as possibly a deep pocket... releasing a lien does not mean the debt is forgiven, it means the home is not subject to the lien anymore.... the debt may still exist..... do not walk to a lawyer... run....

[Deleted]

Hi MWCPA,

Thanks for your concern. I did work with our attorney throughout the process. He's a business attorney with whom both my husband and I went to school and we have known him for over 30 years. We were very careful about exposing ourselves legally as we have substantial assets that could be attached if we made a mistake.

I actually did not "assume" any of her debt. Any legal recourse for the 2nd remains with the estate. Had I found a winning lottery ticket among her possessions, as Trustee I would have been legally required to pay back the loan but alas, no ticket found. Additionally, the 1st is a non-recourse loan (purchase money 1st on a property in CA). The Garn St. Germain bill allows a relative to take over the payments of her home without qualifying or triggering the Due on Sale clause. See: www.law.cornell.edu/uscode/12/usc_sec_12_00001701---j003-.html. Therefore, when I said I took the property "subject to" it means if I want to keep the property I have to keep making the payments but if I were to let the property go into foreclosure the bank couldn't come after me for any deficiency. They don't even have my SSN and it's not being reported on my credit report.

Any legal exposure I have lies with me being the Trustee of her Trust. I suppose someone could hassle me by trying to allege fraud of some kind but cost of litigation discourages most people from nuisance lawsuits. There's been a couple more foreclosures in the complex (including the unit below hers) which further supports that I didn't benefit from any kind of windfall by virtue of being her Trustee.

My concern was how difficult it might be to file another return after filing a "final" return for the estate (and of course the cost of paying for another return our of my own pocket because the bank has known it's been uncollectible for three years!). I was also a little concerned about how to manage any unpaid tax due to the forgiven debt. But after reading how the IRS calculates "insolvency" I feel a little better.

But one last question; even though the end result is the same, do I calculate the insolvency based on the status as of date of death or when the loan is finally forgiven? The math is a lot simpler in 2011 when there's nothing left in the estate!

[mwcpa]

the additional facts are helpful....

insolvency is based upon the FMV of net assets immediately before the discharge.... in your case, assuming discharge in 2011.... 2011... when there are no assets....

[Deleted]

MWCPA,

Thanks!

And I love it when the math is easy! ;D